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HomeEconomyIndia should have 5-7 large banks to spur competition: Arvind Subramanian

India should have 5-7 large banks to spur competition: Arvind Subramanian

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Chief Economic Adviser calls government’s stimulus package a ‘Brahmastra’, aimed at solving problems faced by public sector banks.

New Delhi: A day after the Centre announced a mega recapitalisation plan for public sector banks, Chief Economic Adviser Arvind Subramanian stressed on bank consolidation, saying India should ideally have 5-7 “reasonably large banks”.

“In an ideal banking world of tomorrow, India needs to have both large public sector and private sector banks…we need about 5,6,7 reasonably big banks…to be able to compete domestically and to be competitive internationally,” Subramanian said while delivering a lecture at SGBT Khalsa College in Delhi Wednesday.

He termed Tuesday’s announcement by the finance minister as a ‘Brahmastra’ as it was aimed at addressing the challenges posed by stressed assets and weak balance-sheets of certain banks.

Subramanian highlighted the “benefits” of privatisation such as “freedom to recruit and retain personnel and procure from most efficient sources; avoiding the excessive caution in decision making that often flows from a variety of constraints imposed by referee institutions”, among others.

He stressed that the quantum of caution, inertia and the fears that public sector bank managers experience must be addressed.

Speaking about banking reforms, Subramanian offered a resolution to the problems of “twin balance sheet” through ‘4 Rs’ — recognition, resolution, recapitalisation and reforms.

“The aim is to shrink or narrow the scope of unviable banks… in this view recapitalisation must be selective and incentive-based, directing it to those banks where the bank for the buck in terms of new credit will be maximum,” said Subramanian. “To maintain a minimum capital adequacy, one possibility would be to recapitalise the unviable banks only to the extent necessary to finance their current balance sheet, while explicitly not providing for their growth.”

He said India has moved from “socialism with limited entry to capitalism without exit”. “It is very difficult to get out of inefficient and unproductive production whether in agriculture, fertiliser and civil aviation.”

He linked it to the “exit problem” seen in the “twin balance sheet” challenge. He explained that exit was difficult when public sector banks lend to private sector companies. Subramanian suggested that it may be better to have more private-to-private lending and even private-to-public lending. “We want to be careful before we repeat that experiment again,” he added.

Subramanian said it’s the twin macroeconomic deficit problem in 2013 that gave way to the twin balance sheet challenge. While the recapitalisation package announced Tuesday has covered a long way of addressing the TBS challenge, it is time to move past “both sets of twins”, he said.

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